The US dollar traded higher against most of the other majors yesterday and today in Asia, while equities tumbled during the US session. This may have been due to the more hawkish-than-expected minutes from the latest FOMC gathering. Now, the focus may turn to the US employment report for December, as strong numbers could add more credence to the case of faster rate increases by the Fed.
Fed Minutes Reveal Willingness for Faster Tightening
The US dollar traded higher against the majority of the other major currencies on Wednesday and during the Asian session Thursday. It gained versus AUD, NZD, CAD, and slightly against CHF, while it underperformed versus JPY and EUR. The greenback was found virtually unchanged against GBP.
The strengthening of the US dollar and the yen, combined with the weakening of the risk-linked currencies Aussie, Kiwi, and Loonie, suggests that markets traded in a risk-off fashion yesterday and today in Asia.
Turning our gaze to the equity world, we see that most major European indices closed in the green, extending their new year rally, although at a slower pace. Later in the day, all Wall Street’s leading indices tumbled, with NASDAQ losing the most (3.34%). The negative appetite rolled over into the Asian session today as well.
The catalyst behind the switch in investors’ morale may have been the more-hawkish-than- expected minutes from the latest FOMC meeting, which revealed that officials said the “very tight” labor market might warrant sooner rate increases, as well as that they could also reduce their overall asset holdings to tame elevated inflation, another move that could be considered quantitative tightening.
Indeed, the minutes brought forth expectations over the first rate increase, with the Fed funds futures now suggesting that this could happen in May. The stronger-than-expected ADP report may have also helped expectations over faster rate hikes by the Fed. Now, the focus may turn to the US employment report for December, as strong numbers could add more credence to the case.
All this confirms our view to stay more optimistic on European stocks due to the fact that the ECB will likely refrain from touching the hike button this year. As for the US equities, after yesterday’s tumble, the technical picture suggests that more declines may be in the works, which could be the case after a potentially strong employment report tomorrow. As for the US dollar and the US treasury yields, they could continue rising.
S&P 500 – Technical Outlook
The S&P 500 cash index fell sharply yesterday, breaking below the key support of 4758, a move that may have signaled a short-term trend reversal in our view. Today, the index hit support near the 4675 barrier and rebounded somewhat, but we do see decent chances for the bears to take charge again and push the price lower.
A break below 4675 could initially target the inside swing high of Dec. 21, at around 4655, the break of which could extend the fall towards another intraday high of that day, at around 4616. If the bears are not willing to stop there either, then we could see them aiming for the low of that day, at about 4582.
To start examining the bullish case again, we would like to see a strong recovery back above the 4773 barrier, marked by the inside swing low of Jan. 4. This will confirm the rate’s return within the consolidation pattern formed between Dec. 27 and Jan. 5, with the bulls perhaps initially targeting the 4807 barrier, or the record high of 4817. A break higher would take the index into uncharted territory and may see scope for advances towards the 4850 area.
USD/JPY – Technical Outlook
USD/JPY traded lower yesterday after it hit resistance at 116.18. However, the slide remained slightly above the 115.62 level, marked by yesterday’s low, and above the upside support line taken from the low of Dec. 20. In our view, this keeps the short-term picture positive.
A rebound from near 115.62 could result in another test at 116.18, or perhaps at 116.33, a resistance marked by the high of Jan. 4. If the bulls are willing to break that barrier, they will enter territories last tested in January 2017, and they may decide to shoot for the high of Jan. 11 of that day, at 116.92.
On the downside, we would like to see an apparent dip below 115.35 before we start examining whether the bears have gained the upper hand, even for a while. This could confirm the break below the upside support line taken from the low of Dec. 20 and may initially target the low of Jan. 3, at 114.95. Another break, below 114.95, could extend the fall towards the low of Dec. 29, at 114.65. or the crossroads of the 114.50 barrier and the upside support line taken from the low of Dec. 3.
Elsewhere
We have the final UK services and composite indices for December, which are forecast to confirm their preliminary estimates, while later in the day, we get the ISM non-manufacturing PMI for the month, which is forecast to have declined to 66.8 from 69.1.
Besides the PMIs, we also have Germany’s preliminary inflation numbers for December. The CPI rate is forecast to have ticked down to +5.1% YoY form +5.2%, and the HICP one to have slid to +5.6% YoY from +6.0%. This could raise speculation that Eurozone’s headline CPI rate, due out on Friday, may slide as well.